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Regulated Entities Now Covering the Bill For FINTRAC Compliance Costs

Written with Heidi Unrau

 

We have recently become aware that some reporting entities may not be up to speed on a new piece of regulation that came into force earlier this year. If your business has received an invoice from The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), you will want to read this article.

As of April 1, 2024, FINTRAC officially transferred the cost of its compliance activity from taxpayers to the businesses it regulates, referred to as reporting entities (RE). The move comes four years after the government announced its intention to cut the purse strings in its 2020 Fall Economic Statement. This change allows FINTRAC to start recovering costs from the 2024-2025 fiscal year.

Why the Change?

FINTRAC, Canada’s financial intelligence agency, was previously bankrolled by the taxpayer through the federal budget. The purpose of the new funding model is to align the costs of compliance with those responsible for adhering to anti-money laundering regulations. Simply put, the businesses that are legally required to comply should be the ones funding the oversight needed to ensure compliance. The move aligns with other regulatory agencies that have already established funding models allowing them to recover the costs of their supervisory functions.

Each year, FINTRAC will forecast the total cost of the program for the next three fiscal years. This will determine the amount charged to reporting entities for the upcoming year. They must aso communicate how funds were spent against plans and priorities during the previous fiscal year. This information is included in FINTRAC’s Departmental Results Report.

How the Funding Model Works

Federally regulated financial institutions such as banks, trust and loan companies, and insurance companies are always required to contribute a minimum base amount. All other entities only pay if they submit 500 or more threshold transaction reports to FINTRAC in a fiscal year (i.e. large cash transaction reports [LCTRs], large virtual currency transaction reports [LVCTRs], electronic funds transfer reports [EFTRs], and casino disbursement reports [CDRs]). These ‘other entities’ include but are not limited to:

  • Money Services Businesses
  • Dealers in Precious Metals and Stones
  • Real Estate Brokerages
  • Securities Dealers
  • Casinos
  • Etc.

The Cost Formula

FINTRAC calculates how much reporting entities need to pay based on four key factors:

  1. Type of Entity: Federally regulated entities are charged differently from non-federally regulated entities. These include banks, trust and loan companies, and insurance companies. Federally regulated entities are subject to a base amount, whereas non-federally regulated entities are not subject to this particular fee.
  2. Base Amount: This is the minimum starting fee based on the total value of assets controlled by a federally regulated entity, excluding the assets of their subsidiaries. Base amounts are tiered based on asset value in Canadian dollars. There are nine asset value ranges, from $1 to $1 trillion, with corresponding base amounts ranging from $5,000 to $250,000.
    Range of asset values Corresponding base amount
    $1,000,000,000,000 or more $250,000
    Between $500,000,000,000 and $999,999,999,999 $200,000
    Between $100,000,000,000 and $499,999,999,999 $150,000
    Between $10,000,000,000 and $99,999,999,999 $100,000
    Between $1,000,000,000 and $9,999,999,999 $75,000
    Between $500,000,000 and $999,999,999 $50,000
    Between $100,000,000 and $499,999,999 $25,000
    Between $10,000,000 and $99,999,999 $10,000
    Between $1 and $9,999,999 $5,000

    Source: FINTRAC

  3. Remaining Compliance Cost: This is the leftover cost after collecting the base amounts, divided among all types of reporting entities.
  4. Transaction Volume: Businesses that report over 500 large transactions to FINTRAC pay an additional fee on top of the base amount. Federally regulated banks are not subject to this reporting threshold.

Therefore, the more assets you have and transactions reported to FINTRAC, the higher your final bill will be. Each type of business has its own formula for calculating their share of the cost:

Type of Entity (Business) How Charges Are Calculated
Federally Regulated Banks Base Fee + extra charges based on the value of Canadian Assets.
Trust & Loan Companies, Life Insurance Companies Fewer than 500 reports: Base Fee only.

500 or more reports: Base Fee + extra charges based on value of Canadian assets and volume of large transactions reported.
All Other Entities Over 500 reports: Charges based on volume of large transactions reported compared to others in the same category.

Case Study: How Much Will They Pay?

A small, family-owned currency exchange kiosk in Winnipeg, Manitoba, operates from a single location and is not part of a chain. FINTRAC regulates this type of business as a Money Services Business (MSB). The store typically submits roughly 700 large cash transaction reports each year. Since they exceed the 500 reports threshold, FINTRAC calculates their charges like this (based on industry averages):

Calculation

  1. Base Amount: Not applicable because it is not a federally regulated financial institution (FI).
  2. Remaining Compliance Cost: Total compliance cost to be divided is $33,110,000. This is the sum of all base amounts subtracted from the annual cost of FINTRAC’s compliance program.
  3. Total Reports Submitted by All Entities: 35,000,000 transaction reports were submitted to FINTRAC for the year by all reporting entities, including banks.
  4. Total Reports Submitted by Only Non-Bank Entities: 3,500,000 transactions were submitted to FINTRAC by non-bank entities only, regardless of the transaction reporting threshold amount.
  5. Total Reports Submitted Over the Threshold by Non-Bank Entities: 3,425,000 transactions were submitted to FINTRAC by non-bank entities exceeding the 500-transaction reporting threshold.
  6. Number of Reports Submitted by The Currency Exchange Kiosk: This is the total number of transactions reported to FINTRAC by the currency exchange kiosk in Winnipeg, MB.

Final Charge

Using FINTRAC’s formula: $33,110,000 x (3,500,000 ÷ 35,000,000) x (700 ÷ 3,425,000) = $676.70

Result

The currency exchange kiosk’s total charge for the year would be approximately $676.70. Based on their reporting activity, the bill reflects their share of FINTRAC’s overall compliance costs. Because the kiosk is not a federally regulated bank, trust, loan, or insurance company, the base amount does not apply.

FINTRAC will notify the business via email with an invoice for the cost assessment. The total amount owed is final, conclusive, binding, and due in full upon receipt of the invoice.

Impact on Your Business

The additional financial burden is not ideal, especially for small businesses, but there are ways you can prepare for it. First, you’ll need to budget effectively to avoid surprise charges. Visit the FINTRAC website for a detailed breakdown of the formula used for your type of business, known as ‘Type of Entity’.

Exact charges will vary from year to year depending on the value of your Canadian assets (if applicable), the number of large transactions reported (more or less than 500), and FINTRAC’s compliance cost analysis.

Next, and most importantly, you need an effective and efficient anti-money laundering program to avoid the cost of non-compliance. Violations can result in reputational damage that negatively impacts your business as well as potentially expensive fines, known as administrative monetary penalties (AMPs). FINTRAC has recently levied record-breaking fines for serious violations by repeat offenders. These penalties are preventable and well within your control.

Need a Hand?

If you have any questions or concerns about the new funding model, reach out to us today. We’re here to help you every step of the way, from understanding your new financial obligation, to building, reviewing, or fine-tuning your AML program.

FINTRAC Examinations for the Real Estate Sector

We often hear friends and clients in the real estate sector say they are unsure what to expect if (and when) the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) notifies them of an examination. This article is meant to provide guidance on what to expect and how to ensure a smooth review.

Background

In 2019–20, FINTRAC conducted 399 compliance examinations, of which 146 were focused on the real estate sector [1]. The real estate sector has been the main focus for FINTRAC examinations since 2017 due to the growing concern of money laundering taking place in the Vancouver, Toronto and Montreal real estate market.

For the purpose of assessing compliance, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act gives FINTRAC the authority to inquire into the business of any regulated entity.

FINTRAC examinations are reviews of your compliance program (what you say you are doing to stay in compliance) and your operations (what you’re actually doing to stay in compliance). These exams can take place at any time and should not be confused with your obligation to have an AML Effectiveness Review at least once every two years. FINTRAC examinations can take place in-person onsite at your office, at a FINTRAC office, or over the phone. FINTRAC will provide advance notice of an examination, which is scheduled by telephone and confirmed by letter [2]. Note, due to the COVID-19 pandemic, FINTRAC is not currently conducting onsite examinations [3].

I Have Received Notice of an Exam. Now What?

FINTRAC will request documentation, including your compliance policies and procedures, assessment of risks of money laundering and terrorist financing, measures to mitigate high risks, samples of transaction documentation, and other documents be summitted to them. Based on FINTRAC’s areas of review, the below is a sample list of what you can expect to provide. We have also created a more detailed version of the list which you can find here.

  • Most recent version of compliance policies and procedures;
  • Most recent version of your documented risk assessment;
  • Copy of the last two documented internal and/or external reviews of your compliance program (this may include the reviewer’s working papers as well);
  • Training program and records;
  • Organizational Chart;
  • Financial Statements;
  • Number of full-time and part-time employees/sales representative;
  • All suspicious and attempted suspicious transaction records;
  • A list of all closed deals related to the sale/purchase of real estate;
  • In-Trust bank account records; and
  • Large cash transaction records.

You will generally have 30 days to provide all requested documentation to FINTRAC. It’s a good idea to read through the request carefully before you begin your preparation.

Whether you are submitting your materials on paper or in electronic format, it is a good idea to create folders or cover pages for each item that FINTRAC has requested. This creates separate sections for each item and helps you to stay organized. A missed item usually can’t be submitted once the deadline has passed, and can result in deficiencies. We’ve created a sample format for your submission package that you can download for free here.

The Exam

Whether the FINTRAC exam is in-person, at their office or over the phone, they follow very similar formats. The key difference is the regulator’s ability to request additional operational data during onsite examinations.

It is ok for you to take notes throughout the examination process (and we recommend that you do). You are permitted to have a lawyer, consultant or other representative with you (if you do, FINTRAC will request that you complete the Authorized Representative Form in advance). While your representative cannot generally answer questions on your behalf, they can prompt you if you are nervous or stuck, and help you to understand what is being asked of you if it is not clear.

The Introduction

The examiner will provide a brief overview of the examination process as a formal opening to the examination. At the end of this introduction, the examiner will ask if you have any questions. At this point, it can be useful to provide a very brief (five minutes maximum) overview of your business.

Your introduction should reflect the materials that you have already submitted to FINTRAC (which ideally included an opening letter that described anything about the business that would not be readily apparent to the examiner, or anything that you believe could be misunderstood). Key facts about your business include:

  • Your corporate structure and ownership;
  • The types of products and services that are offered/types of transactions that are conducted;
  • Where your offices, agents and customers are located;
  • How you connect with your customers; and
  • Anything significant that has changed since your last FINTRAC examination.

This overview should be simple and brief.  At this point, the examination will then begin. At the end of each section, the examiner will ask if you have any questions and let you know whether there are any deficiencies.

Compliance Policies & Procedures

During this part, FINTRAC will ask questions about the policy and procedure documents that you have provided in advance of the examination. There are a few standard questions that are generally asked:

  • Who wrote the policies and procedures?
  • Were the versions submitted to FINTRAC the most recent versions?
  • When were they last updated?
  • When and how do you identify your customers?
  • How do you ensure that identification is up to date?
  • How do you monitor transactions?
  • How do you recognize, document and monitor “business relationships” (note: this is any time that you have either an ongoing service agreement with a customer and/or your customer has performed two or more transactions that require identification [4]).
  • What are indicators of a suspicious transaction?
  • The examiner will also ask a number of questions based on the documents that you have submitted, including questions about compliance-related processes.

Risk Assessment

During this part, FINTRAC will focus on your Risk Based Approach, asking specific questions about the Risk Assessment and related documents that you have provided in advance of your examination. Again, there are some common questions that are asked:

  • Do you have any high risk customers or business relationships?
  • What factors do you consider in determining that a customer or business relationship is high risk?
  • How are customer due diligence and enhanced due diligence different (both generally, and in your processes and documentation)?

Most additional questions will be related to risk management processes. For example, it has been common in the last few months for examiners to ask if a customer or transaction could be rejected (“Yes, if it was outside of our risk tolerance”).

This may also lead to questions about whether or not an Attempted Suspicious Transaction Report (ASTR) or Suspicious Transaction Report (STR) was filed. If there were reasonable grounds to suspect money laundering or terrorist financing, the answer should be yes. If not, you should explicitly say “There were not reasonable grounds to believe that this event was related to money laundering or terrorist financing”, then provide an explanation.

Operational Compliance & Reporting

During this part, the examiner will ask questions about specific transactions/deals. Some of the cases that you must be ready to explain are:

  • A transaction matches an indicator of potentially suspicious activity (if there were reasonable grounds to suspect money laundering or terrorist financing, the answer should be that you filed an STR, if not, you should explicitly say that “there were not reasonable grounds to believe that this event was related to money laundering or terrorist financing”, then provide an explanation);
  • Questions related to receipt of funds and large cash transactions; and
  • Business relationships and ongoing monitoring (in particular, if this did not occur earlier in the examination).

During a desk examination, the examiners typically do not request additional materials.

During onsite examinations, it has become commonplace for examiners to request additional materials. These are generally related to:

  • Business relationships;
  • Ongoing monitoring (including the monitoring of business relationships);
  • High risk customers;
  • Enhanced due diligence; and
  • Other risk-based processes.

Be clear with the examiner about what can be extracted easily from your IT systems, and in the case that data cannot be extracted easily, be prepared to show the examiner an example (or several). If your system has an “auditor access” feature (generally read-only access with search capability), it can be useful to set this up in advance of the onsite visit.

Exit Interview

Congratulations – you’ve made it to the finish line!

At this point, the examiner will sum up the findings (if there are any), and read a standard disclosure statement. For most of us, the disclosure statement is terrifying, as it talks about penalties. This is standard process – do not be alarmed. When the examiner has finished, you may ask if a penalty is being recommended (if you’re a worrier, please do this). Not all FINTRAC examiners will provide guidance at this stage, but it doesn’t hurt to ask.

After the Exit Interview

After the examination and exit interview, generally within 30 days, you will receive a formal letter that details FINTRAC’s findings. The letter will state either of these possibilities:

  • No further compliance or enforcement action;
  • Possible follow-up compliance action; or
  • A recommendation for an enforcement action, such as an administrative monetary penalty (AMP).

In the case that there is an AMP imposed, we recommend taking action as soon as possible. In most cases, FINTRAC does not require real estate brokers and sales representatives to submit an action plan.

We’re Here To Help

If you need assistance preparing for a FINTRAC exam or have any compliance questions in general, please contact us.

 

 

[1] https://www.fintrac-canafe.gc.ca/publications/ar/2020/1-eng

[2] FINTRAC considers the date on which you are advised of an examination, which is typically done by phone, to be the start of the compliance examination process.

[3] https://www.fintrac-canafe.gc.ca/covid19/covid-2020-07-27-eng

[4] Effective June 1, 2021 a business relationship will be defined as either entering into an ongoing service agreement with a customer and/or your customer has performed one or more transactions that require identification.

Amended AML Regulations June 10, 2020 – Redlined Versions

The following red-lined versions have been created to reflect final amendments to Canadian anti-money laundering (AML) laws & regulations published in the Canada Gazette on June 10, 2020.  Amendments to the Cross-border Currency and Monetary Instruments Reporting Regulations will come into force on June 1, 2020. All other amendments will come into force on June 1, 2021. We have created industry specific blogs to make understanding the changes easier, which are located here.

Redlined versions of all the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations are listed below for download.

These documents are not official versions of the regulations. Official versions can be found on the Government of Canada’s Justice Laws Website.

Regulations Amending the Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act

Please click the link below for downloadable PDF file.

Regulations Amending the Regulations Amending Certain Regulations Made Under the Proceeds of Crime July 2019 – Redlined_June 2020

Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations

Please click the links below for downloadable pdf files.
PCMLTF_July_2019_Redlined_Full_July_2019 – Redlined_June 2020

Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations

Please click the links below for downloadable pdf files.
PCMLTF_Suspicious_Transaction_Reporting_Regulations_July_2019 – Redlined_June 2020

Proceeds of Crime (Money Laundering) and Terrorist Financing Registration Regulations

Please click the link below for a downloadable PDF file.
PCMLTF_Registration_Regulations_July_2019 – Redlined_June 2020

Proceeds of Crime (Money Laundering) and Terrorist Financing Administrative Monetary Penalties Regulations

Please click the link below for a downloadable pdf file.
PCMLTF_Administrative_Monetary_Penalties_Regulations_July_2019 – Redlined_June 2020

Proceeds of Crime (Money Laundering) and Terrorist Financing Cross-Border Currency and Monetary Instruments Reporting Regulations

Please click the link below for a downloadable pdf file.
PCMLTF_Cross-Border_Currency_and_Monetary_Instruments_Reporting_Regulations_July_2019 – Redlined_June 2020

Need a Hand?

Whether you need to figure out if you’re a dealer in virtual currency, to put a compliance program in place, or to evaluate your existing compliance program, we can help. You can get in touch using our online form, by emailing info@outliercanada.com, or by calling us toll-free at 1-844-919-1623.

Amending the Amendments! 2020 AML Changes for Real Estate

Background

Back on July 10, 2019, the highly anticipated final version of the amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its enacted regulations were published. However, on June 10, 2020, further amendments to those amended regulations were published in the Canada Gazette. To make reading these changes a little easier, we have created a redlined version of the regulations, with new content showing as tracked changes, which can be found here.

The purpose of this round of amendments is to better align measures with international standards and level the playing field across reporting entities by applying stronger customer due diligence requirements and beneficial ownership requirements to designated non-financial businesses and professions (DNFBPs). The amendments come into force on June 1, 2021.

We have summarized the changes that will have an impact on real estate developers, brokers, and sales representatives below.

Business Relationship

One of the most significant proposed changes for real estate developers, brokers, and sales representatives is related to the definition of a business relationship. Currently, a business relationship is defined as:

If a person or entity does not have an account with you, a business relationship is formed once you have conducted two transactions or activities for which you have to:

  • verify the identity of the individual; or
  • confirm the existence of the entity.

The amendments change the definition for real estate developers, brokers, and sales representatives to the first time that the person or entity is required to verify the identity of the client.

For business relationships, a reporting entity must:

  • keep a record of the purpose and intended nature of the business relationship;
  • conduct ongoing monitoring of your business relationship with your client to:
    • detect any transactions that need to be reported as suspicious;
    • keep client identification and beneficial ownership information, as well as the purpose and intended nature records, up-to-date;
    • reassess your client’s risk level based on their transactions and activities; and
    • determine if the transactions and activities are consistent with what you know about your client;
  • keep a record of the measures you take to monitor your business relationships and the information you obtain as a result.

 This change in definition also means that ongoing monitoring must be applied for the following purposes:

  1. detecting any transactions that are required to be reported;
  2. keeping client identification information and the information up to date;
  3. reassessing the level of risk associated with the client’s transactions/activities; and
  4. determining whether transactions or activities are consistent with the information obtained about their client, including the risk assessment of the client.

PEP

The amendments will require real estate developers, brokers, and sales representatives to make a Politically exposed persons (PEP) determination when they enter into a business relationship (as defined above) with a client.

In addition, they will also be required to take reasonable measures to determine whether a client from whom they receive an amount of CAD 100,000 or more is a PEP.

If a positive determination is made, the following records must be kept:

  1. the office or position, and the organization or institution, in respect of which the person is determined to be a politically exposed foreign person, a politically exposed domestic person or a head of an international organization, or a family member of, or a person who is closely associated with, one of those persons;
  2. the date of the determination; and
  3. the source, if known, of the person’s wealth.

Beneficial Ownership

The amendments will require real estate developers, brokers, and sales representatives to comply with existing beneficial ownership requirements that apply to other reporting entities.

This means when identifying an entity, a reporting entity needs to collect the following information for all Directors and individuals who own or control, directly or indirectly, 25% or more of the organization:

  • Their full legal name;
  • Their full home address; and
  • Information establishing the ownership, control, and structure of the entity.

A record of the reasonable measures to confirm the accuracy of the information, when it is first obtained and in the course of ongoing monitoring of business relationships, must be retained.

We’re Here To Help

If you would like assistance in updating your compliance program and processes, or have any questions related to the changes, please get in touch!

Amending the Amendments!

Background

Back on July 10, 2019, the highly anticipated final version of the amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its enacted regulations were published. However, on February 15, 2020, further proposed amendments to those amended regulations was published in the Canada Gazette. To make reading these changes a little easier, we have created a redlined version of the regulations, with new content showing as tracked changes, which can be found here.

The Regulatory Impact Statement for this round of proposed changes states the following: “The proposed amendments to the regulations would strengthen Canada’s AML/ATF Regime, align measures with international standards and level the playing field across reporting entities by applying stronger customer due diligence requirements and beneficial ownership requirements to designated non-financial businesses and professions (DNFBPs); modifying the definition of business relationship for the real estate sector; aligning customer due diligence measures for casinos with international standards; aligning virtual currency record-keeping obligations with international standards; clarifying the cross-border currency reporting program; clarifying a number of existing requirements; and making minor technical amendments”. The proposed amendments are expected to come into force on June 1, 2021.

As with all proposed changes, there is a comment period. This comment period is much shorter than the last one, at only 30 days. For anyone interested in commenting on the proposed changes, comments are to be addressed to Lynn Hemmings, Director General, Financial Crimes and Security Division, Financial Sector Policy Branch, Department of Finance, 90 Elgin Street, Ottawa, Ontario K1A 0G5 or email: fin.fc-cf.fin@canada.ca.

While these are proposed changes, guidance from FINTRAC related to the amendments to regulation would hopefully be seen ahead of the coming into force dates of the final version.

We have summarized what this could mean for your business below.

Money Services Businesses

PEP

The most significant proposed change for Money Services Businesses (MSB)s is related to Politically exposed persons (PEP) determinations. Currently, a PEP determination must be made for international EFTs of CAD 100,000 or more. The proposed regulations will require MSBs to make a PEP determination when the MSB enters into a business relationship with a person.

If you currently conduct list screening, PEP screening could easily be added to that process.

Dealers in Virtual Currency

Travel Rule

For dealers in virtual currency, there is an additional proposed requirement on top of the requirements that were published in the last round of AML changes.  The proposed amendments add the requirement for records to be kept for virtual currency transfers of CAD 1,000 or more.

The record must contain the following:

  1. include with the transfer, the name, address and, if any, the account number or other reference number of both the person or entity that requested the transfer and the beneficiary; and
  2. take reasonable measures to ensure that any transfer received includes the information referred to in paragraph (a) above.

If the information required is not obtained, a determination of whether the transaction should be suspended or rejected will need to be made.

Given the nature of virtual currency transfers, it will be interesting to see how this requirement plays out, as currently, there are no technology solutions (that we are aware of) that would solve for this.

A reminder that dealers in virtual currency will be considered MSBs as of June 1, 2020. Check out our blog post for a full list of regulatory requirements related to dealers in virtual currency.

Real Estate

Business Relationship

One of the most significant proposed changes for real estate developers, brokers and sale representatives is related to the definition of a business relationship. Currently, a business relationship is defined as:

If a person or entity does not have an account with you, a business relationship is formed once you have conducted two transactions or activities for which you have to:

  • verify the identity of the individual; or
  • confirm the existence of the entity.

The proposed amendments will change that definition for real estate developers, brokers and sale representatives to only one transaction.

For business relationships, a reporting entity must:

  • keep a record of the purpose and intended nature of the business relationship;
  • conduct ongoing monitoring of your business relationship with your client to:
    • detect any transactions that need to be reported as suspicious;
    • keep client identification and beneficial ownership information, as well as the purpose and intended nature records, up-to-date;
    • reassess your clients risk level based on their transactions and activities; and
    • determine if the transactions and activities are consistent with what you know about your client;
  • keep a record of the measures you take to monitor your business relationships and the information you obtain as a result.

We will have to wait for guidance to see how ongoing monitoring obligations applies to the real estate sector if this change takes effect.

PEP

The proposed amendments will require real estate developers, brokers and sale representatives to make a Politically exposed persons (PEP) determination when they enter into a business relationship (as defined above) with a client. In addition, they will also be required to take reasonable measures to determine whether a client from whom they receive an amount of CAD 100,000 or more is a PEP.

Beneficial Ownership

The proposed amendments will require real estate developers, brokers and sale representatives to comply with existing beneficial ownership requirements that apply to other reporting entities.

This means when identifying an entity, a reporting entity needs to collect the following for all Directors and individuals who own or control, directly or indirectly, 25% or more of the organization:

  • Their full legal name;
  • Their full home address; and
  • Their role and/or ownership stake in the organization.

Given the obligation is to obtain, rather than verify, such information, we do not expect this requirement to be overly burdensome for the real estate sector.

Dealers in Precious Metals and Stones

PEP

Dealers in Precious Metals and Stones (DPMS)s will be required to make a PEP determination when they enter into a business relationship with a client. In addition, a DPMS will be required to take reasonable measures to determine whether a person from whom they receive an amount of CAD 100,000 or more is a PEP.

A reminder that a business relationship is defined as:

If a person or entity does not have an account with you, a business relationship is formed once you have conducted two transactions or activities for which you have to:

  • verify the identity of the individual; or
  • confirm the existence of the entity.

Given the definition of a business relationship, we do not expect this requirement to be overly burdensome. If you currently conduct list screening, PEP screening could easily be added to that process.

Beneficial Ownership

The proposed amendments will required DPMSs to comply with existing beneficial ownership requirements that apply to other reporting entities.

This means when identifying an entity, a reporting entity needs to collect the following for all Directors and individuals who own or control, directly or indirectly, 25% or more of the organization:

  • Their full legal name;
  • Their full home address; and
  • Their role and/or ownership stake in the organization.

Given the obligation is to obtain, rather than verify, such information, we do not expect this requirement to be overly burdensome for the DPMS sector.

We’re Here To Help

If you would like assistance in updating your compliance program and processes, or have any questions related to the changes, please get in touch!

Are Your Business Relationship Records Ready for FINTRAC?

This article is focused on business relationships that are not account-based (which means that if you are a financial institution or a securities dealer that only conducts transactions with your customers in the context of the accounts that they hold with you, you can skip this one).

Over the past few months, I have assisted some of my clients with their Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) examinations.  While I cannot generally answer questions on my clients’ behalf during these meetings, I can help them prepare for the examination, understand what the examiner is asking for, and redirect them if they stray off track (provided that they have signed an Authorizing_or_Cancelling_a_Representative form). While the businesses examined were quite different in size and complexity, their examinations have been similar, particularly when it came to questions about business relationships.  

For certain types of reporting entities, including money services businesses (MSBs), real estate businesses, and dealers in precious metals and stones (DPMSs) (which are the focus of this article), during each on-site review, the FINTRAC examiner requested a list of all the “Business Relationships” for the review period. Certain information was requested, which was the same in each instance, and included the following:

  • The purpose and intended nature of the business relationship (sometimes called PINBR for short);
  • The risk rating;
  • The date the reporting entity entered into a business relationship with the customer; 
  • The records of any ongoing monitoring (or enhanced measures for high risk business relationships) that has been conducted; and 
  • The last time the customer information was reviewed/updated.

In most cases, this information was not requested in advance.  This meant that it needed to be provided to the examiner while the examiner was on-site (typically a single business day).  For some reporting entities, obtaining this information was not something that their recordkeeping systems were set up to do easily.

Quick Review – What is a Business Relationship?

The Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR) defines a Business Relationship as:

Any relationship with a client, established by a person or entity, to conduct financial transactions or provide services related to those transactions and, as the case may be,

(a) If the client holds one or more accounts with that person or entity, all transactions and activities relating to those accounts; or

(b) If the client does not hold an account, only those transactions and activities in respect of which that person or entity is required to ascertain the identity of a person or confirm the existence of an entity under these Regulations.

If you’re not entirely certain what that means, FINTRAC’s guidance on Business Relationship Requirements provides additional clarification:

You enter into a Business Relationship when you conduct two or more transactions where you have to:

    1. ID an individual; or
    2. Confirm the existence of an organization.

Specifically, conducting the following transactions or activities that require you to identify an individual or confirm the existence of an entity:

  • Remittances or transmissions of $1,000 or more (for MSBs);
  • Foreign currency exchange of $3,000 or more (for MSBs);
  • Issuing or redeeming negotiable instruments of $3,000 or more (for MSBs);
  • Large cash transactions (for all reporting entity types);
  • Suspicious transactions and attempted suspicious transactions (for all reporting entity types);
  • Activities which trigger a receipt of funds record (for Real Estate);
  • Virtual currency exchange transactions of $1,000 or more (for MSBs as of June 1, 2020);
  • Large Virtual Currency Transactions Reports (for all reporting entities as of June 1, 2020); and
  • Activities which trigger the creation of a client information record (it’s probably worth mentioning here that these will also trigger a third party determination):
    • Entering into an ongoing service agreement with a customer that is an entity (for MSBs); and/or
    • Entering into a purchase or sale agreement (for Real Estate).

In its simplest form, a business relationship means that a client or customer has done two things that cause identification requirements to be triggered.

Business Relationship Recordkeeping & Monitoring

When you establish a Business Relationship with a customer, you have three things to do.  

First, determine and record the “purpose and intended nature” of the Business Relationship. Some examples provided in the FINTRAC guidance are: 

For MSBs:

  • Foreign exchange for travel or purchase of goods; 
  • Funds transfers for family support or purchase of goods; 
  • Buying/cashing money orders or traveller’s cheques; 

For Real Estate businesses:

  • Purchasing or selling residential property;
  • Purchasing or selling commercial property;
  • Purchase or selling land for commercial use;

For DPMSs:

  • Purchasing or selling jewellery;
  • Purchasing or selling precious metals (for example, gold, silver, platinum, or palladium); and
  • Purchasing or selling precious stones (for example, diamonds, sapphires, emeralds, tanzanite, rubies, or alexandrite).

Next, you need to conduct ongoing monitoring of all Business Relationships, based on the level of risk.  This seems to be where the biggest stumbling blocks are for reporting entities. The purpose of ongoing monitoring is to ensure the following:

  • Detect any transactions that need to be reported as suspicious;
  • Keep identification and beneficial ownership information, as well as the purpose and intended nature records, up-to-date;
  • Reassess the risk level based on their transactions and activities; and 
  • Determine if the transactions make sense given the nature and purpose recorded.

It is not enough just to conduct the monitoring, you must be able to produce some type of record that proves that you’ve done the monitoring. The record should be specific about what was done, and what conclusions were drawn.

If there is something out of the ordinary, expect that the FINTRAC examiner will ask questions. For example, if a customer has indicated that the purpose and intended nature of the business relationship is “fund transfer for family support” but it is clear that payments are being made that are related to the purchase of goods, questions will be raised. It is expected that information about the purpose and intended nature of the business relationship is updated if it has changed – and that you will ask questions when the actual transaction patterns are different than what you expected.

It is this final step, keeping a record of the measures taken to monitor your business relationships and the information you obtain as a result, that is most crucial to successful examination results. 

The additional information collected about the customer is used to compare your expectations for that relationship, with the transactions that customer is conducting.  

Here are a few examples, broken down by industry:

MSBs

If the nature and purpose provided was foreign exchange for travel, does it make sense that the customer returns every other day with $2,700 in cash?   

DPMSs

If the nature and purpose provided was purchasing jewellery as a wedding gift, does it make sense that the customer returns every month on the same day to make a new purchase?

Real Estate

If the nature and purpose provided was the purchase of a first-time owner-occupied home, does it make sense that the customer purchases another owner-occupied home shortly after?  

In each of the scenarios above, it is quite clear that the activities don’t align with the nature and purpose of the business relationship collected. This doesn’t automatically make it suspicious, but certainly leaves some questions that need answering. When you question the customer about the discrepancy, be sure you’re taking notes.  This does not have to be a complete reiteration (though it can be), but simply a brief synopsis of the conversation, any additional information collected and/or adjustments made to the customer’s risk rating. It should be written in a way that would be clear to someone from outside of your business that is reading the notes two years later.

Recording these types of discussions is paramount to evidence that you’re meeting your ongoing monitoring obligations because, in the compliance world, if you can’t prove it… it never happened.

FINTRAC Exam Readiness Tool for Business Relationships

We’ve made a quick checklist to help you prepare for your FINTRAC examinations.

Question Response & Action Plan
Can I generate a list of my business relationships for the examination period?
Is there a risk rating recorded for each business relationship?
Do I have evidence of ongoing monitoring being conducted?
Do I have evidence of enhanced due diligence and enhanced transaction monitoring for high risk business relationships?
Do I have the date of when I entered in the business relationship with each customer?
Is there a record of the last time the customer information was reviewed and/or updated?

 

Need a Hand?

Outlier has created a FINTRAC Examination Preparation Package, and it can be downloaded for free here.  FINTRAC has also provided information on their assessment manual, which details the approach and methods it uses to conduct compliance examinations. 

For additional information, assistance, or a review of your FINTRAC Examination submission package (the information requested by FINTRAC for an examination), you can get in touch using our online form, by emailing info@outliercanada.com, or by calling us toll-free at 1-844-919-1623.  At Outlier, we firmly believe that good compliance is good business.

FINTRAC Identification Guidance

Background

On July 10th, 2019, the final amendments to Canada’s anti-money laundering (AML) regulations were published in the Canada Gazette.  One of the welcomed changes that came into force immediately upon publication was related to identification. On November 14th, 2019, FINTRAC published guidance related to “Methods to verify the identity of an individual and confirm the existence of a corporation or an entity other than a corporation.” This is good news considering the range of identification methods has been broadened, and a step forward in digital identification methods. The updated methods are designed to make it easier to identify customers that are not physically present.

As defined under the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR), reporting entities have to identify their customers in certain situations (specific information on when customers need to be identified is outlined in FINTRAC’s guidance on “When to identify individuals and confirm the existence of entities”). The identification guidance outlines ways to verify the identity of an individual, and how to identify corporations or entities other than corporations (such as a partnership).

Identification Methods For Individuals

There are three ways in which an individual can be identified:

  • Government-issued photo identification method;
  • Credit file method; and
  • Dual-process method.

Government-Issued Photo Identification Method

Under this method, an organization can use an authentic, valid and current government-issued photo identification document, issued by either a federal, provincial or territorial government in order to be used to verify the identity of an individual. Foreign government-issued photo identification can be accepted if it’s equivalent to a Canadian document such as those listed in the guidance.

The photo identification document used to verify identity must:

  • indicate the individual’s name;
  • include a photo of the individual;
  • include a unique identifying number; and
  • match the name and appearance of the individual being identified.

If a customer is physically present, an organization can authenticate an identification document by looking at the characteristics on the physical document such as security features.

If the customer is not physically present, the authentication of the identification document must be determined by using technology capable of assessing the document’s authenticity. The guidance makes it clear that it is not sufficient to view a person and an identification document through video conference or similar. Meaning, a selfie while holding your driver’s license is not sufficient for identification purposes.

Whatever method is selected by an organization, the process to authenticate a photo identification document, and how the organization will confirm that it is authentic, valid and current, must be documented.

Credit File Method

Under this method, an organization can use valid and current information from a Canadian credit file to identify an individual.

The Credit File must:

  • be from a Canadian credit bureau (credit files from foreign credit bureaus are not acceptable);
  • have been in existence for at least three years; and
  • match the name, address and date of birth that the individual provided.

To rely on a credit file, the search must be completed at the time an organization is verifying the individual’s identity, and can be completed via an automated system or the use of a third party vendor.

When using the Credit File method, organizations must keep a record of the following information:

  • the individual’s name;
  • the date they consulted or searched the credit file;
  • the name of the Canadian credit bureau or third party vendor holding the credit file; and
  • the individual’s credit file number.

The guidance clarifies that sometimes information found within the credit file may contain variations of the name or address provided by a customer. In these cases, it’s up to the organization to determine whether the information in the credit file is a match to the information collected from the individual.

Dual-Process Method

Under this method, an organization can use valid and current information from two reliable sources. Under the dual-process method, an organization can verify an individual’s identity by referring to any two of the following options:

  • information from a reliable source that includes the individual’s name and address;
  • information from a reliable source that includes the individual’s name and date of birth; or
  • information that includes the individual’s name and confirms that they have a deposit account, credit card or other loan account with a financial entity.

In order to qualify as reliable, the sources should be well-known and considered reputable. There must be two sources providing the information, and the information cannot come from the individual whose identity is being verified, nor can it come from the organization doing the verification. For example, reliable and independent sources can be the federal, provincial, territorial and municipal levels of government, crown corporations, financial entities or utility providers.

A Canadian credit file can be used as one of the two sources required to verify the identity of an individual. so long as the credit file has been in existence for at least six months.

The organization must keep a record of the following:

  • the individual’s name;
  • the date they verified the information;
  • the name of the two different sources that were used to verify the identity of the individual;
  • the type of information consulted (for example, utility statement, bank statement, marriage licence); and
  • the number associated with the information (for example, account number or if there is no account number, a number that is associated with the information, which could be a reference number or certificate number, etc.).

Identification Methods For Organizations

The guidance details how to confirm the existence of a corporation, or an organization that is not a corporation. This can be done by referring to a paper or electronic record that was obtained from a source that is accessible to the public such as:

  • For corporations:
    • its certificate of incorporation;
    • a certificate of active corporate status;
    • a record that has to be filed annually under provincial securities legislation; or
    • any other record that confirms the corporation’s existence, such as the corporation’s published annual report.
  • For organizations that are not corporations:
    • a partnership agreement;
    • articles of association; or
    • any other record that confirms its existence as a legal entity.

If an organization refers to a publicly accessible electronic record to confirm the existence of a corporation or of an entity other than a corporation, a record must be retained including the corporation/entity’s registration number and the source of the electronic version of the record. If a paper record is used, a copy should be retained. At a minimum, for all organization types, an organization must collect and keep a record of the following:

  • their full legal name;
  • the organization’s structure;
  • the organization’s principal business;
  • the organization’s physical address; and
  • information about the organization’s directors and beneficial owners.

Other Identification Considerations

The guidance details how a domestic or foreign affiliate, an agent or a mandatary can be used to verify the identify of a customer. If this method is used, it is important for organizations to remember that, legally, they are responsible for verifying a customer’s identity, even though they are relying on someone else to do it. Organizations should obtain the identification information from the other entity and have a written agreement in place requiring the entity doing the identification to provide the identification verification as soon as feasible.

The guidance details how to identify children under 12 years of age (organizations must verify the identity of a parent, guardian, or tutor) and how to identify children between the ages of 12 and 15. For this age range, organizations can verify identity by using one of the prescribed methods to verify an individual’s identity and where not possible, relying on certain  information from the child’s parent, guardian, or tutor, and information that includes the child’s name and date of birth.

The guidance also reminds organizations that while the personal information that they are collecting is protected by the Personal Information Protection and Electronic Documents Act (PIPEDA), personal information that is required to be included in reporting to FINTRAC does not have to be disclosed to the Office of the Privacy Commissioner of Canada. It is important that organizations remember that safeguarding is a key consideration for all personal information collected in the normal course of business.

Conclusion

The most significant change for identification standards is related to the Government-Issued Photo Identification Method. A wording change from “original” to “authentic”, that was found in the prior version of the regulations, now allows for scanned copies of documentation, so long as it can be authenticated. It is noteworthy that the guidance gives clarity to all methods that can be used. Where further clarity is warranted, organizations can contact FINTRAC for a policy position related to the identification guidance. This can be done free of charge by emailing guidelines-lignesdirectrices@fintrac-canafe.gc.ca. This can also be done on a no-names basis by a lawyer or consultant on your behalf.

We’re Here To Help

If you have questions related to the identification changes, or need help updating your identification processes, you can get in touch using the online form on our website, by emailing us at info@outliercanada.com, or by calling us toll-free at 1-844-919-1623.

2019 AML Changes For The Real Estate Sector

Background

On July 10, 2019 the highly anticipated final amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), and its enacted regulations, were published. This article is intended to give a high-level summary of changes as they relate to the real estate industry. If you’re the type that likes to read original legislative text, you can find it here. We also created a red-lined version of the regulations, with new content showing as tracked changes, which can be found here.

It is expected that all regulated entities will have to significantly revamp their AML compliance program due to the amount of changes. There are three different “coming into force” dates that should be noted.

 

  • June 25, 2019: a wording change from “original” to “authentic” related to identification. This is welcomed news for digital identification.
  • June 1, 2020: changes related to dealers in virtual currency (which do not apply to the Real Estate sector).
  • June 1, 2021: all other regulatory amendments.

While this does give regulated entities some time to get their AML compliance programs updated, we recommend that you start budgeting and planning from now.

Updated guidance from FINTRAC is expected to be seen ahead of coming into force dates. Given the legislative changes, there will be changes to FINTRAC policy interpretations as well, so be sure to monitor closely and save any interpretations that you may have used for due diligence purposes.

Hefty Disclaimer

This article should not be considered advice (legal, tax or otherwise). That said, any of the content shared here may be used and shared freely – you don’t need our permission. While we’d love for content that we’ve written to be attributed to us, we believe that it’s more important to get reliable information into the hands of community members (meaning that if you punk content that we wrote, we may think you’re a jerk but we’re not sending an army of lawyers).

What Does This Mean For My Business?

As stated above, there are quite a number of changes, but only some have an impact on real estate developers, brokers, and sales representatives. We’ve summarized the changes that will impact the real estate sector below.

Identification

The final regulations replace the word “original” with “authentic”, and state that a document used for verification of identity must be “authentic, valid and current”. This means you can confirm identification, using acceptable documents presented by way of electronic means, so long as it can be authenticated. This will be helpful to real estate developers, brokers, and sales representatives that identify clients in a non-face-to-face manner. This change came into force on June 25, 2019.

Other changes to the identity verification requirements are as follows:

  • For credit file verification (single source), the credit file information must now be derived from more than one source.
  • For the dual source method, when relying on a credit report as part of a dual source, the credit file must have been in existence for at least six months. Additionally, the person or entity that is verifying the information cannot be a source.

FINTRAC Reporting

Virtual Currency

For real estate brokers, sales representatives and developers that conduct transactions that involve virtual currency, the final regulations introduce new reporting requirements for the receipt of CAD 10,000 or more of virtual currency. These basically are the same as large cash reporting obligations, including making a determination if the person from whom the virtual currency is received is acting on behalf of a third party, and will require reporting entities to maintain a large virtual currency transaction record.

The requirements for reporting and recordkeeping for virtual currency are very similar to cash reporting requirements.

24-hour rule

The final regulations clarify that multiple transactions performed by, or on behalf of, the same customer or entity within a 24-hour period are to be considered as a single transaction for reporting purposes when they total CAD 10,000 or more. Only one report would need to be submitted to capture all transactions that aggregate to CAD 10,000 or more. For real estate developers, brokers, and sales representatives, this would apply to recipients of CAD 10,000 or more in cash or virtual currency.

Suspicious Transaction Reporting

Currently, if a reporting entity has reasonable grounds to suspect that a transaction, or attempted transaction, is related to money laundering or terrorist financing, a report must be submitted to FINTRAC within 30 days of the date that a fact was discovered that caused the suspicion. The revised regulations amended this to “as soon as reasonably practicable” after measures have been completed to establish that there are reasonable grounds to suspect that a transaction, or attempted transaction, is related to money laundering or terrorist financing.

This would require reports to be submitted to FINTRAC fairly soon after a reporting entity conducts an analysis that established reasonable grounds for suspicion. It will be important to have detailed processes for unusual transaction investigations. It will be interesting to see how FINTRAC looks at this obligation during examinations.

Terrorist Property Reporting

A very small change (or clarification), related to Terrorist Property Reports, has been made in the final regulations. The timing requirement for filing has changed from “without delay” to “immediately”. This means regulated entities need to report that they are in possession of terrorist property as soon as they become aware.

Schedules

The final regulations introduce changes to reporting schedules, requiring more detailed information to be filed with FINTRAC then previously was required. Even where information is marked as being optional, if a reporting entity has the information, it becomes mandatory to include it. As it relates to real estate developers, brokers, and sales representatives, these changes will impact attempted suspicious and suspicious transaction reporting, terrorist property reporting, large cash reporting, and large virtual currency reporting. Examples of the new data fields are as follows:

  • every reference number that is connected to the transaction (including the sending and receiving addresses for virtual currency transactions);
  • type of device used by person who makes request online;
  • number that identifies device;
  • internet protocol address (IP address) used by device;
  • person’s user name; and
  • date and time of person’s online session in which request is made.

Such changes may mean working with your IT folks to ensure you are retaining the needed data in a format that will be easy to extract.

For more details on what has changed for reporting fields, a comparison of current and proposed FINTRAC report fields can be found here.

Compliance Program

Risk Assessment

One of the deficiencies identified in the Financial Action Task Force (FATF) review of Canada was not having a requirement to assess new technologies before their launch. The final amendments require all reporting entities to assess the risk related to products and their delivery channels, as well as the risk associated with the use of new technologies, prior to release.

This has been a best practice since the requirement to conduct a risk assessment came into force, but this change makes this a formal requirement. This will require strong communication and closer cooperation between compliance officers and teams involved in the development of new services or technology changes.

Training

Under current regulation, if real estate developers, brokers, and sales representatives use agents, mandataries or other persons to act on their behalf, they must develop and maintain a written, ongoing compliance training program for those agents, mandataries or other persons. The final regulations introduce an additional requirement, in which there must be a documented plan for the ongoing compliance training program and delivery of the training.

Records

There are some changes to the details that must be recorded in records that real estate brokers or sales representatives must maintain. In addition to new information that is required for reporting purposes (see the schedules section below), the final regulations add the requirement that information records must contain details of every person or entity for which they act as an agent or mandatary in respect of the purchase or sale of real property or immovables. Under the previous regulations, only information related to the person or entity purchasing real estate was required.

In cases where real estate brokers, sales representatives and developers were required to keep records related to reasonable measures to obtain certain information, the requirement has been removed with this round of changes. It is important to note that you must still take reasonable measures where necessary, and it is only the requirement to keep a record of the measures used that has been repealed.

We’re Here To Help

If you would like assistance in updating your compliance program and/or processes, or have any questions related to the changes, you can get in touch using our online form on our website, by emailing info@outliercanada.com, or by calling us toll-free at 1-844-919-1623.

Are On Demand Products Right For You?

For certain industries, including dealers in precious metals and stones (DPMSs) and real estate, Outlier’s on-demand products are anti-money laundering (AML) and counter terrorist financing (CTF) programs that you can buy, customize online using our set up wizard, and download in fully customizable formats.

These can be purchased as single elements (Policies & Procedures, Risk Assessments, Training, Compliance Effectiveness Reviews) or bundled to save you money.

Why On Demand Products

Outlier’s co-founder, Amber D. Scott, noticed two things that made her believe that on-demand products could help Canadian reporting entities. First, for many small and medium sized businesses, there are very similar business models and risk profiles. Second, many businesses don’t have the means to pay for consulting services but have the same obligations as larger reporting entities. She had a vision of creating a model that could level the playing field by making it easier for these businesses to create plain language documents in an affordable way.

Are On Demand Products Right For You?

While we’ve worked to keep the on demand products as plain language as possible, they will still require you to be able to read and understand the content and adjust them for your business model and compliance processes. You’ll also need to review and update them regularly (once a year – no matter what, and more often if Canadian laws and/or your business models change).

These program elements can save you money by providing a customizable framework for you to work with, but you’ll need to put in the time and effort to customize them and keep them up to date.

What If You Download A Product And Need Help?

If you’ve downloaded on demand products and you’re stuck, we can help. Please contact us and let us know what you need. In your request, include the product that you’ve purchased and describe the problem that you’re trying to solve. We’ll get back you within two business days. If you need help sooner, please mark your request as urgent, and we’ll do our best to get back to you sooner.

Is Outlier The Only Company That Can Help?

There are a number of professionals in Canada that can help you customize your program, including consultants, lawyers and Compliance Officers working in your field. Using Outlier’s on demand product doesn’t mean that we’re the only people that can work with you, in fact, we believe that competition makes us all better at what we do.

How Do I Buy On Demand Products?

You can buy our on demand products through this website using a credit card. Start by selecting the type of reporting entity that you are to view the products that are currently available.

If you’re looking for something that doesn’t seem to be on the list, please contact us.

Real Estate Sector – Identifying Individuals

We often hear friends and clients in the real estate sector say they are frustrated that there are not many ways to identify a customer other than meeting them face-to-face. Real estate developers, brokers and sales representatives have an obligation to ascertain a customer’s identity which requires them to refer to specific information and/or documentation to verify a customer’s identity.  However, this does not mean that identification must take place face-to-face. Below is a summary of all the different methods outlined in FINTRAC Guidance that are currently available to identify customers that are individuals and what’s coming.[1]

This article should not be considered advice (legal or otherwise). Throughout this article we refer to a purchaser of real estate as a customer, but you may refer to them as clients depending on your internal procedures. Also, your internal procedures may dictate what methods are acceptable in identifying a customer. If you are unsure, consult with your Compliance Officer where there is any doubt on what is acceptable within your organization.

Face-to-Face Identification for Individuals

When meeting customers face-to-face you may ask for a piece of identification that is:

  • Issued by a provincial, territorial or federal government in Canada or an equivalent foreign government (a foreign Passport would be acceptable for example);
  • Valid, not expired (if there is not expiry date this must be stated in the customer identification record);
  • Bears a unique identifier number (such as a driver’s license number);
  • Bears the name of the individual being identified;
  • Is an original (not a copy, photo, scan, video call, etc.); and
  • Bears a photo of the individual being identified.

Information that must also be collected and recorded includes things such as the customer’s full name (no initials, short forms or abbreviations), their occupation, date of birth, etc. The needed information is included in various fields on industry customer identification forms that are used so it is crucial they are complete and accurate.

Single Process Method

Under the single process method, a customer’s identify can be confirmed by completing  a credit header match on their Canadian credit file, provided it has been in existence for at least three years and has at least two trade lines.  This means there is not a ‘hard hit’, impacting the customer’s credit score. This must be completed at the time of confirming a customer’s identity and cannot take place earlier or later.  To be acceptable, the credit file details must match the exact name, date of birth and address provided by the customer. When using this method to confirm a customer’s identity a record of the following information must be retained:

  • The customer’s name;
  • The name of the Canadian credit bureau holding the credit file;
  • The reference number of the credit file; and
  • The date the credit file was consulted.

Dual Process Method

Where the single process method provides information that does not match what the customer has provided and/or the credit file does not meet the requisite requirements, the dual process method can be used to identify that customer.  This involves referring to information from reliable and independent sources and must be original, valid and the most recent.  In order to qualify as reliable, the sources should be well-known and reputable. Reliable and independent sources can be the federal, provincial, territorial and municipal levels of government, crown corporations, financial entities or utility providers. It is important to note that independent means neither of the sources can be the same, nor can they be you or your business.

Documentation being used must be in its original form.  This makes electronic documents the preference because the customer can send the originals via email, while retaining a copy for themselves. You cannot accept documents that have been photocopied, scanned or faxed.

Under the dual process method, you can refer to any two of the following options:

  • Documents or information from a reliable source that contain the customer’s name and date of birth;
  • Documents or information from a reliable source that contain the customer’s name and address; or
  • Documents or information that contain the customer’s name and confirms that they have a deposit, credit card or other loan account with a financial entity.

The table below provides some examples of the sources and documents that can be referred to when confirming a customer’s identification.  In order to meet the standards of the dual process method, two documents must be obtained but each document cannot be in the same column.

 

Documents or information to verify name and address

 

 

Column A

 Documents or information to verify name and date of birth

 

 

Column B

 Documents or information to verify name and confirm a financial account

 

Column C

 
Issued by a Canadian government body:

Any card or statement issued by a Canadian government body (federal, provincial, territorial or municipal):

·      Canada Pension Plan (CPP) statement;

·      Property tax assessment issued by a municipality; or

·      Provincially-issued vehicle registration.

·      Federal, provincial, territorial, and municipal levels.

CRA documents:

·      Notice of assessment;

·      Requirement to pay notice;

·      Installment reminder / receipt;

·      GST refund letter; or

·      Benefits statement.

 Issued by a Canadian government body:

Any card or statement issued by a Canadian government body (federal, provincial, territorial or municipal):

·      Canada Pension Plan (CPP) statement of contributions;

 

 

Issued by other Canadian sources:

·      Referring to a customer/customer’s Canadian credit file that has been in existence for at least 6 months; or

Insurance documents (home, auto, life);

 Confirm that your customer/customer has a deposit account, credit card or loan account by means of:

·      Credit card statement;

·      Bank statement;

·      Loan account statement (for example: mortgage);

·      Cheque that has been processed by a financial institution;

·      Telephone call, email or letter from the financial entity holding the deposit account, credit card or loan account; or

·      Identification product from a Canadian credit bureau (containing two trade lines in existence for at least 6 months);
Issued by other Canadian sources:

·      Referring to the customer/customer ‘s Canadian credit file that has been in existence for at least 6 months;

·      Utility bill (for example, electricity, water, telecommunications);

·      T4 statement;

·      Record of Employment;

·      Investment account statements (for example, RRSP, GIC); or

·      Identification product from a Canadian credit bureau (containing two trade lines in existence for at least 6 months).

 

Where the dual process method is used to confirm the identity of a customer, a record of certain information must be maintained. Specifically:

  • The customer’s name;
  • The name of the two different sources that were used to identify the customer;
  • The type of information (for example, utility statement, bank statement, etc.) that was referred to;
  • The account number associated with the information for each source (if there is account number, you must record a reference number); and
  • The date the information was verified.

Third Parties (Agent or Mandatary)

If you are unable to use any of the methods above (say in the case of a foreign buyer that you cannot meet with face-to-face), you can ask someone in their area to identify them on your behalf.  There must be a written agreement or arrangement in place before using this method and procedures must be in place on how the third party will identify a buyer.

 

What’s To Come?

On June 9th, 2018, draft amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its enacted regulations (there are five separate regulations that we’re going to collectively call regulations here for simplicity’s sake) were published. The draft amendments include some positive changes in respect to requirements related to identity verification.

With regards to the identification document used to identify a customer, the draft amendments replace the word “original” with “authentic” and state that a document used for verification of identity must be “authentic, valid and current.” This may[2] allow for scanned copies of documentation and/or for software that can authenticate identification documents to be used for the dual process method.

Under the draft amendments, regarding the single process method, information in a credit report must be derived from more than one source (this means there must be more than one trade line).

Under the draft amendments, real estate developers, brokers and sales representatives would be allowed to rely on identity verification undertaken by other regulated entities. This method requires a written agreement and a requirement to deliver the identity documentation within three days.

 

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If you have questions regarding the identification requirements in place currently or the requirements that are in draft form please contact us.

 

[1] Note that methods used to identify customers that are organizations are different from the ones discussed in this article.

[2] There is no certainty in this regard until a final version is published and FINTRAC has provided their guidance on the matter.

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